08ASTANA869, RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES –

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UNCLAS SECTION 01 OF 02 ASTANA 000869
SENSITIVE
SIPDIS
DEPARTMENT FOR EEB/TPP/ABT/ATP JANET SPECK
E.O. 12958: N/A
TAGS: EAGRETRDPGOVKZ
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -
KAZAKHSTAN
REF: STATE 39410
¶1. (SBU) This cable constitutes post's response to reftel,
which requested specific information regarding the impact in
host country of rising food and agricultural commodity
prices.
¶2. (SBU) DEMAND: The most important foods and agricultural
commodities consumed in Kazakhstan include flour, bread, meat
(beef, pork, horsemeat, and mutton), chicken, butter,
sunflower oil, milk, eggs, potatoes, rice and sugar.
According to Kazakhstan's National Statistics Agency, prices
on these products rose by 26.6 percent during the second half
of 2007. Prices on fruits and vegetables, a large portion of
which are imported from neighboring countries, rose
significantly as well: apples by 42 percent, cabbage by 45
percent, tomatoes by 29 percent. The reasons for food price
rises in Kazakhstan are multifold. A high economic growth
rate over the past several years has pushed up consumer
purchasing power, thus generating an increased demand for
specific food products. Increased demand for meat and daily
products has led to increased demand for grain to feed
livestock.
¶3. (SBU) SUPPLY: Increased agricultural commodity demand and
higher prices have led to increased domestic investment in
agriculture, more government support for the sector, and
utilization of additional farmland to expand crop production.
In April 2008, the government imposed a temporary ban on the
export of wheat (though not of flour) effective through
September 1, at which time the government will decide whether
to lift the ban, taking into account the summer wheat
harvest. The temporary export ban was motivated by the
government's desire to ensure adequate domestic wheat supply
and to keep domestic prices down on wheat and wheat products.
Kazakhstan must ultimately return to exporting, as annual
wheat production far exceeds consumption. In fact,
Kazakhstan is the world's fifth largest wheat exporter. In
general, agricultural commodity supply in Kazakhstan is
impacted by ineffective land use, state subsidies for
inefficient large farms at the expense of smaller family
farms, and bottlenecks in food supply chains such as
shortages of storage facilities that contribute to crop
losses. There are also high transportation costs and
administrative barriers that make food production expensive.
Grain production in Kazakhstan is highly dependent on
weather conditions.
¶4. (SBU) POLITICAL IMPACT: There have been small protests
against rising bread prices in Kazakhstan's largest city,
Almaty, but no major demonstrations. There has been no
measurable affect on the stability of the government, nor has
there been a meaningful impact on relations between classes,
ethnic groups, or urban vs. rural dwellers.
¶5. (SBU) ECONOMIC IMPACT: Kazakhstan faces a double
challenge with regard to the current food inflation as high
levels of natural resource-fueled growth since 2000 have lead
to a steady rise in overall inflation from 6.7 percent in
2004 to 18.8 percent in 2007. The 2007 figure was well above
the initial 7 percent inflation projection of the National
Bank of Kazakhstan. There has been no significant impact of
agricultural price increases on Kazakhstan's trade balance,
as agricultural products make up only 10 percent of overall
external trade turnover. As Kazakhstan is a major energy
exporter, its private sector development and medium-term
economic growth prospects are principally influenced by oil
and gas prices, though the global financial crisis has had an
important impact on shorter-term growth. Kazakhstan's
agricultural sector had a growth rate of 8.4 percent during
¶2007. Further increases in agricultural production can make
an important contribution to the country's economic
diversification strategy.
¶6. (SBU) ENVIRONMENTAL IMPACT: Thus far, there has been no
direct environmental impact apart from utilization of
additional farmland to expand crop production in response to
rising demand and rising prices. It remains unclear whether
plans to manufacture biofuels from wheat and corn will be
reconsidered.
¶7. (SBU) GOVERNMENT POLICY RESPONSE: In response to rising
agricultural commodity and food prices, the government
announced national food security to be a priority in 2008 and
increased budget allocations for agricultural production.
Kazakhstan's Kazyna National Development Fund has provided a
$200 million a credit line for agricultural producers. The
government has also increased subsidies for the production of
oil-bearing crops, sugar beet, and corn, and has subsidized
ASTANA 00000869 002 OF 002
purchase of seeds and fuel. In addition, Prime Minister
Masimov proposed a new law on food security in order to
prevent food shortages and the creation of a special reserve
for major food products. The government has also created
so-called "stabilization funds" to store up basic food
products (bread, flour,
sugar, oil) in case of shortages or
speculation. Some regional government administrations have
signed MOU's with large food producers to stabilize prices
and have provided discounts and targeted cash transfers to
vulnerable groups. In October 2007, the government imposed a
ban on the export of oil-bearing seeds in response to a
shortage of sunflower seeds; this ban has been extended to
October 1, 2008. As noted in para 3, in April 2008, the
government imposed a temporary ban on the export of wheat
(though not of flour) effective through September 1, at which
time government will decide whether to lift the ban, taking
into account the summer wheat harvest.
¶8. (SBU) IMPACT ON POST PROGRAMS: USAID has one regional
technical assistance program in the agricultural sector --the
"Regional Agricultural Linkages Project" -- which attempts to
strengthen supply chain linkages among the five Central Asian
countries. The focus is on wholesalers, packagers, and
distributors of agricultural products. Thus far, the food
price rises have not affected this assistance program.
¶9. (SBU) POLICY PROPOSALS: Based on a policy study completed
last year to which the USG contributed and which provides
guidance consistent with USG assistance, the World Bank
recently made a presentation to the Kazakhstani government
which reviewed and assessed policy options with respect to
controlling agricultural prices, increasing supply, reducing
demand, protecting consumers, and reducing marketing margins.
The policy choices Kazakhstan faces will determine whether
it will pursue an outward-looking approach to food security
-- increasing agricultural exports to generate the income
needed to contribute to imports -- or will turn inward to
regulate prices in its domestic market, which will undermine
its long-term competitiveness and sector productivity. While
all of the choices available to the Kazakhstani government
have both pros and cons, broadly speaking, we would advise
the Kazakhstanis to avoid market-distorting interventions,
such as price controls and export bans. The most efficient
and least market distorting option would be focusing on
social support programs which directly assist the most
vulnerable parts of the population. These can include direct
cash transfers to the needy, food stamps, and food-for-work
programs. The World Bank's report also recommends scaling
down input subsidies and instead strengthening research and
development, training and education, and rural
infrastructure, including irrigation and transportation to
improve farm efficiency. Furthermore, the report recommends
improving the economic enabling environment for an efficient
agricultural sector by not skewing subsidies towards large
farms and avoiding discretionary powers of local governments
to control prices in local bazaars. The report further
recommends improving the functioning of the land market by
redistributing agricultural land for a nominal fee while
gradually raising the land tax, which would create incentives
to increase efficiency.
ORDWAY

The information recorded on this site has been extracted from http://Wikileaks.org (Kazakhstan) database..

We wish to express our gratitude to Julian Assange and his team for making this data available as it is an important public record.

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